Econ 371 Fall 2006 Solution: Problem Set #4.

1. Suppose that a random sample of 200 20-year-old men is selected from a population and their height ( X ) and weight ( Y ) is recorded. A regression of weight on height yields:

= 99.41 + 3.94 X , R 2 = 0.81 , SER = 10.2 Y

(a) In this study weight is measured in pounds and height is measured in inches. What is the regressions weight prediction for someone who is 70 inches tall? 65 inches tall? 74 inches tall?

= 99.41 + 3.94*70 = 176.39 If X = 70 , then the predicted weight is Y = 99.41 + 3.94*65 = 156.69 If X = 65 , then the predicted weight is Y = 99.41 + 3.94*74 = 192.15 If X = 74 , then the predicted weight is Y
(b) A person has a late growth spurt and grows 1.5 inches over the course of a year. What is the regressions prediction for the increase in the persons weight?

*1.5 = 3.94*1.5 = 5.91 pounds. The predicted change in the persons weight is 1
2. You have the following data on 11 students combined SAT scores ( X ) and their cumulative grade point average at graduation ( Y ):

#
Y X

1 3.63 1490

2 2.37 1300

3 3.33 1510

4 3.32

5 3.27

6 2.37

7 3.61

8 3.23

9 2.59

10 3.30

11 3.21

1420 1490 1180 1550 1460 1300 1450 1550

(a) X = 3.11 , Y = 1427.27 ,

i =1 (Yi Y )( X i X ) = 484.55 ,
11

i =1 ( X i X )
11

= 140018.18

(b)Assume that these observations were generated by the following model:

Yi = 0 + 1 X i + ui , where ui is the random error term

Compute OLS estimators of 0 and 1 using the formulas derived in class.

Y Y )( X i X ) 484.55 = i =1 ( i = = 0.00346 1 2 11 140018.18 X X i=1 ( i )

11

=Y X = 3.11 0.00346*1427.27 = 1.828 0 1 and the estimated error u for all i=1,11 i = Yi Y (c) Calculate the predicted GPA, Y i i = 1.828 + 0.00346* X , Y i i
# Y
i

i = Yi Y u i
4
3.09 0.23

1
3.33 0.30

2
2.67 -0.30

3
3.40 -0.07

5
3.33 -0.06

6
2.25 0.12

7
3.54 0.08

8
3.22 0.01

9
2.67 -0.08

10
3.19 0.11

11
3.54 -0.32

i u

(d) Using the definitions of the Total Sum and Squares (TSS) and the Sum of Squared Residuals (SSR) given below compute R 2 of this regression and interpret your result

TSS = i =1 (Yi Y ) = 2.064

11 2

i ) = 0.388 SSR = i =1 ( u
11

SSR 0.388 = 1 = 1 0.188 = 0.812 TSS 2.064 This result implies that about 81% of variation in students GPAs in this sample R2 = 1

is due to the differences (variation) in their SAT scores. 3. (a)

n n n i =1 (Yi Y )( X i X ) = i=1 (Yi Y )X i i=1 (Yi Y )X = n n n = i =1 (Yi Y )X i X * i =1 (Yi Y ) = i =1 (Yi Y )X i X * 0 = n = i =1 (Yi Y ) X i

(b)
n n n i=1 ( X i X )( X i X ) = i=1 ( X i X )X i i=1 ( X i X )X = n n n = i =1 ( X i X )X i X * i =1 ( X i X ) = i =1 ( X i X )X i X * 0 = n = i =1 ( X i X ) X i

Extra Credit (worth 3 percentage points on the first exam) Suppose we want to estimate a simple regression model assuming that intercept term is equal to zero. In other words we assume that the population regression line goes through the origin: E (Yi | X i ) = 1 X i (as opposed to the usual case in  denote the OLS estimator of , i.e. which we have E (Yi | X i ) = 0 + X i 1 ). Let 1 1  is the solution to the problem of minimizing the sum of squared errors, which
1

in this case is given by

i=1 (Yi 1 X i )
n

 . . Find the formula for 1

n X In order to minimize the sum of squares S = i =1 Yi 1 i

 with respect to 1

we take the derivative and equate it to zero: dS n  X X =0 = 2* i =1 Yi i 1 i  d

 we get After solving for 1

 = 1

i =1Yi X i n i =1 X i 2
n

This is the OLS estimator of the slope coefficient in the regression through the origin.